Democrats Differ on How to Deal With Mortgage Crisis

During last weekend’s Democratic debate, when CNN’s Wolf Blitzer wasn’t trying to get the two surviving candidates to spit in each other’s faces, a lot of substantive discussion took place. One of the topics mentioned, which we have yet to cover in this column, was the mortgage crisis. And although it wasn’t deliberated at much length, Hillary Clinton said her position on the issue was one of the biggest policy distinctions between her campaign and Barack Obama’s.

The major differences revolve around whether or not to freeze interest rates and put a moratorium on foreclosures. But both are also calling for more transparency and accountability in the mortgage industry and proposing tens of billions to help some faltering homeowners.

Clinton has called for a voluntary foreclosure moratorium of 90 days on subprime, owner-occupied homes; a five year freeze on interest rates; and status reports on the number of mortgages being modified. If Wall Street does not voluntarily agree to the three proposals, and “the crisis builds,” Clinton says she will consider legislation to protect mortgage servicers — those who collect payments and penalties on the loans — from lawsuits by investors because they attempt to work with homeowners to modify their mortgages.

(The Bush Administration recently formed a private sector coalition called HOPE NOW that would voluntarily freeze interest rates – or refinance or modify the loans – for homeowners with steady incomes and relatively clean payment histories who cannot afford a higher adjusted rate.)

In the debate, Obama said he did not support an interest freeze because: “If we have such a freeze, mortgage interest rates will go up across the board and you will have a lot of people who are currently trying to get mortgages who will actually have more of a difficult time. So, some of the people that we want to protect could end up being hurt by such a plan.”

He also does not support a moratorium. An advisor told the Wall Street Journal that this was because it could deter lenders from issuing new mortgages.

These stances led the leftist magazine, The Nation, to criticize his plan for being “short on aggressive government involvement and infused with conservative rhetoric about fiscal responsibility.”

Not that Clinton’s freeze was thoroughly welcomed, either. Two economists writing in The New Republic said: “Such a policy would clearly send a dangerous message far beyond our borders. Two trillion dollars of U.S. national debt is held by foreign governments. Interest rates on this debt are low in part because foreigners trust the U.S. to pay back its loans as promised. The rates would surely be higher if its holders thought the U.S. could renege on its promises to pay.”

The differences in the rest of their plans are less dramatic, although still apparent. Clinton has proposed a $30 billion fund to help states and localities manage the fallout of foreclosures, and Obama has called for a $10 billion home foreclosure prevention fund, which he said in the debate would “help to bridge the lender and the borrower so that people can stay in their homes.”


Image from RealtyTrac’s new report on foreclosure trends. It shows a 75 percent increase in foreclosure activity over the previous year.
Forbes Magazine noted that the candidates have been vague about how they would pay for these funds, although Obama would pay for part of his through fines on irresponsible lenders that committed fraud. But the piece goes on to note, however, that: “Fraud proceedings and penalties are sorted out over a long period of time. This avenue of funding will likely not provide immediate relief.”

Other aspects of the Clinton plan include requiring mortgage brokers to disclose details about their commissions; creating a national registration for brokers who are licensed by the state they operate in; eliminating prepayment penalties on mortgage products; and expanding the goals of Fannie Mae and Freddie Mac — the government sponsored enterprises that help stabilize the mortgage markets – to include helping a larger number of at-risk homeowners avoid foreclosure.

And Obama’s plan is furthered by a mortgage credit for homeowners who do not itemize, which his campaign estimates will provide an average of $500 to 10 million homeowners. He would also eliminate a provision that prevents bankruptcy courts from modifying an individual’s mortgage payments.

Both candidates, also senators, have introduced legislation regarding the mortgage crisis.

Clinton reintroduced legislation last month that would “empower state housing finance agencies to temporarily use the proceeds from tax-exempt bond issuances to help tens of thousands of families refinance unworkable mortgages.” She also introduced a bill that would increase oversight over the mortgage industry.

Obama reintroduced legislation in mid 2007 that would give borrowers stronger legal rights, and would clarify the definition of mortgage fraud.

None of the bills have received many (if any) cosponsors.

Tags: real estate